My Golden Rule of Saving: Pay yourself last, but always pay yourself something!

Roses, roses everywhere but you have no spare money to sniff them?

To store up money for optional, fun needs lots of planners say “Pay yourself first, and then pay your bills”. Take money out of your paycheck for discretionary wants at the outset and then take on the bills. To my thinking that causes problems.

When you pay yourself first, you can overpay yourself!  If you do overpay yourself, then you will be unable to fully pay off bills. If that continues, then your bills become a heavier and heavier burden, even daunting. Eventually those bills will seem insurmountable, and they will be. Chances are you’ll never have money needed to “smell the roses.”

Likely, you bills reflect some unwise, impulse needs spending done. That’s why I don’t rely on the “Pay yourself first, and then pay your bills” approach. I advocate and practice the opposite approach, “Pay yourself last, but always pay yourself something.”  It’s my Golden Rule of Saving.

Assume the process is just beginning. On the first day of the month, my paycheck for the preceding month arrives by electronic deposit to my bank checking account. I move a fixed amount of money from that account into my PRIMARY SAVINGS ACCOUNT. I do not have that money moved automatically. I write a check to transfer the funds.

It’s is of making self-discipline become a comfortable regimen. Over time, trying to renege begins to internally feel like the worst act of treason “I to myself.” Once the temptation to renege on the transfer is overcome several times, it becomes second nature with no second thoughts in play.

The remaining money in my checking account is my “adjusted take home pay”. My usual monthly bills are paid as they arrive in the mail. A few are automatic payments arranged via my bank. Loan payments and insurance premiums are examples. I limit automatic payments because if they’re overlooked it messes up my checkbook accounting.

To protect against bounced checks and resulting fees, I arrange overdraft protection on my checking account. Overdraft protection consists of having an automatic loan of funds done by the bank whenever a received check would cause the account to have a negative balance. There’s a drawback. Money the bank “lends” to the account is in increments of say $200.00, $400.00 etc., depending on the amount of the oncoming negative balance. That loan comes with an annual rate of interest of 18%-24%, 1.5%-2.0% per month. Regularly examine your balance and pay back any overdraft loan as soon as you discover it.

Rarely do I have many additional checks to write beyond the monthly bills. Usually, they’re for surprises covered from my RAINY DAY SAVINGS ACCOUNT. Intermittently, they’re covered from my PRIMARY SAVINGS ACCOUNT. Almost all ongoing every day and all major expenses are paid via a single credit card. I always pay that on the last day due, by phone. That allows any funds needed from my savings accounts to continue to gain interest for the most days. Albeit a small amount, it’s a sound practice to do so. Occasionally, I withdraw some cash for pocket money – the least necessary amount so as to minimize the burning a hole in my pocket phenomenon.

With very rare exceptions, at the end of the month there are always some funds left in my checking account. Let’s refer to these as the END OF MONTH (EOM) funds. Once my next paycheck has been electronically deposited into my checking account, I transfer half of the EOM funds to my PRIMARY SAVINGS ACCOUNT and the other half to my RAINY DAY SAVINGS ACCOUNT. That insures that at the end of every month, I have acted to “Pay myself last.”

Because each month’s bills, ongoing credit card purchases and other ongoing paid expenses vary, the EOM amount differs from month to month. On some occasions, I notice that my next needed check will overdraw my account and the EOM is projected to be negative. To cover the shortage, I take funds (plus a small additional amount) from my RAINY DAY SAVINGS ACCOUNT. I compensate by adjusting the EOM allocations to be unequal amounts so as to repay my RAINY DAY SAVINGS ACCOUNT. That’s how I insure the “But always pay myself something” piece.

Add EOM funds to PRIMARY SAVINGS ACCOUNT continuously to accumulate a target minimum balance to sustain. That’s an estimated upper limit for larger expenses anticipated to occur over some comfortable period of time, perhaps during the coming year. The amount above the base is for long term needs such as retirement planning. Aim to get the extra amount to a desired level over a desired longer period of time. It may drop off from time to time but be recoverable and growing overall.

Add EOM funds to the RAINY DAY SAVINGS ACCOUNT to accumulate a target minimum balance, too. It’s an estimated upper limit for surprise larger expenses that are likely to occur over a year or so. Once the base amount needed is reached, the growing excess funds are available for “smell the roses” activities. You can use them when the moments feel right. The amount of excess funds will fluctuate up and down as those moments come and go. But you are sniffing those roses!

The perspective of this setting is that an individual has modest cash in a checking and various savings accounts and wants to begin accumulating more. Act to set up the PRIMARY SAVINGS ACCOUNT and the RAINY DAY SAVINGS ACCOUNT with those feasible initial amounts of money deposited into them. Then the “pay yourself last, but always pay yourself something” process works if practiced faithfully. Once initiated and done for a few months, it begins to become a routine task. You look at your checking account EOM balance for the end of the prior month, split it into halves and deposit those into the two savings accounts.

Next time, I’ll cover budgets, budget busters, and creating an accurate monthly budget – on the fly! With careful, diligent management of a personal budget the RAINY DAY SAVINGS ACCOUNT balance periodically rises significantly above the minimum balance. That allows the choice to do smell the roses types of activities frequently enough to sustain a happy outlook.